Friday, 3 October 2008

Home equity loans; the party is over

The home equity cash fountain has finally dried up. During the second quarter of this year, UK home debtors stopped borrowing against their housing equity and paid off almost ₤3 billion of outstanding loans.

In the past, homeowners were taking out around 8 percent of GDP. With house prices crashing and home equity evaporating, banks have severely cut back lending to home owners.

Ultimately, this is good news. The UK household sector has taken the first small step towards reducing the crushing pile of debt accumulated over the last ten or so years.

12 comments:

Anonymous
said...

Britain: Forty percent of children live in poverty

By Peter Reydt3 October 2008

http://www.wsws.org/articles/2008/oct2008/chld-o03.shtml

In 174 of the 646 parliamentary constituencies across the UK, more than 50 percent of children fall into these categories. Naturally there is a wide discrepancy between affluent and poorer constituencies.

It is what the Campaign to End Child Poverty says, check the article and the quotes:

Whilst official measures of child poverty are based on a national survey of family income, the new research published by the Campaign to End Child Poverty was compiled using tax credit data. This gives the percentage of children on low incomes in local authorities and constituencies across the UK, as well as at the more local ward level in England and Wales and in local zones in Scotland.

"poverty" has a meaning. Abusing it in the service of a social engineering goal to equalise incomes is dishonest.

Relative poverty can never disappear without communism (which ironically causes absolute poverty to soar). Bemoaning "x% of children are below [insert arbitrary line]" is like bemoaning 50% of kids for having below average IQ.

Taken in isolation, I can understand why you might think that this sudden fall in housing equity withdrawal might be deflationary. However, you need to look at the big picture and ask another question; what is the level of aggregate demand relative to aggregate supply?

Consider first, the fiscal stance. This year, the UK government is likely to run a deficit of about 4% of GDP. So Darling and the rest of his ministerial big spenders are doing a lot to push up inflationary pressure.

Second, the current account deficit also shows excess aggregate demand. We are producing far less than we are consuming. Despite the fall in housing equity withdrawal, consumers are still managing to borrow. As a consequence, we are still running up huge external deficits. While the deficit of itself is not inflationary, the adjustment to balance is likely to see the exchange rate fall in with higher import prices, were likely to see more inflation.

The monetary growth numbers are unambiguous; the growing at double-digit rates. Sooner or later, this will add to inflationary pressures.

The bail out, which is inevitable with you like it or not, will its own way add to inflation. I believe that banks are continuing to extend credit to the corporate sector which is keeping the economy going and maintaining aggregate demand. Banks are doing this to cover what I believe to be a growing stock of bad loans. All banks do this when they face rising default rates. The Bank of England is complicit in this process by pushing out huge amounts of liquidity to keep banks operating. This is the first stage of the bail out - pump up the liquidity.

The second stage of the bail out will be when the government extracts all those bad loans from bank balance sheets. Once this happens, banks will begin to extend credit again. However, there will be a huge monetary overhang which will inevitably lead to higher prices.

Turning to the supply side of the economy. No one has talked about the structural weaknesses that now confront the UK economy. There are several such weaknesses, but my favourite is the the UK financial sector. This sector is like the interwar coal industry; it's far too large to accommodate future demand for financial services and has to shrink. This will have several implications, one of which will be a negative supply shock. In other words, the UK will be able to produce less goods than it has in the past, and with all the extra money floating around from the extraordinary liquidity operations and low interest rates from the Bank of England, will have the classic inflationary scenario of too much money chasing too few goods.

Notwithstanding anything I've just said, the numbers are unambiguous, ever since this crisis started, inflation has risen.

- MEW in isolation is unambiguously deflationary. Debate is whether countervailing trends render it moot- Deficits are problem but do not equal inflation. Rebalancing of currency causes import prices to rise. Countervailing is the massive decreases in commodity prices (e.g. Indian steel to China has nearly halved in price lately). End result is lower sterling to sounder currencies but global prices as a whole going down- Most important goods are positional, such as housing, education, healthcare and personal services. All of those are headed down in price in a hurry. Recession exacerbates the decline.- Bailout falls foul of liquidity trap, moving cash from working capital into long dated mortgage bonds. Companies fail, economy declines, prices fall- financial sector (and retail) shrink = less employment = less income = lower effective demand = lower prices on discretionary goods.

"The monetary growth numbers are unambiguous; the growing at double-digit rates. Sooner or later, this will add to inflationary pressures."

Monetary flows are always ambiguous. As they say "It's not the size, it's what you do with it."

"The second stage of the bail out will be when the government extracts all those bad loans from bank balance sheets. Once this happens, banks will begin to extend credit again. However, there will be a huge monetary overhang which will inevitably lead to higher prices."

But begin to extend credit to whom? Certainly not to the economy at large. Companies will have folded. People will be without jobs. The risk there is too high.

So they need to lend to someone who is desperate for money, but is guaranteed to be able to repay. Do you know who it is yet? Hint: Begins G-O-V

It'll be the 1930's again - at least for the banks.

It just depends how long it'll take the Gov to print enough money to overcome the sucking sound of bank credit.

"What does poverty in the UK mean in practice?==============Material poverty.Poverty means not having enough money to pay for the things you need. From Oxfam’s experience of working with people living in poverty we know that this may involve families and individuals not having enough to eat, being unable to heat their homes, not having adequate warm clothing, and not having enough money to cope with unforeseen events, such as the need to repair a broken washing machine.

At Oxfam, our experience shows us that poverty is caused by circumstances beyond an individual’s control: things such as your gender, your nationality, or where you live."

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"Children of benefit scroats enjoy a material quality of life far above even upper middle class kids of 100 years ago."

Nick, that is ignorant and mindless crap.

There is plenty of real poverty in the UK. I guess you have been reading the Sun?

I did not hear parliament voting on this. Why are the purse strings being pulled without democratic consultation? At least in the USA people get to vote.I find this situation very scary. We elect a government who seems intent on bankrupting us all.

I get the impression that the cash flow will get so bad that the banks can no longer function properly. One sign of this would be with bank transactions being delayed. To me that would be an initial sign of a bank collapse and the time to move money to Ireland or buy bars of gold.